Washington's Debt-Ceiling Debate – A Political Sham

[Editor's Note: If you want to understand how business and politics interact, nobody can explain it better than Money Morning's Martin Hutchinson. Today the former global merchant banker employs some of Washington and Wall Street's own financial tricks to prove that the looming debt-ceiling debate is a political sham - and to show you that our elected leaders are attacking the wrong problem.]

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I have to tell you that – as a former international merchant banker – I want to laugh out loud when I hear the dire predictions of how the United States will have to default if Congress doesn't raise the nation's debt ceiling.

With a little Wall Street-style creative financing – even when the government's outstanding debt level reaches the official limit of $14.3 trillion sometime around the end of March – there's no reason why the country can't go on borrowing as if nothing has changed.

But the two sides are arguing about the wrong thing: It's the country's debt load – not the debt ceiling – that has to be addressed. And I can prove it to you.

Like a consumer who's in over his head, Uncle Sam has several alternatives available before his creditors arrive to repossess his vehicles and cut up his credit card. By highlighting some of the "debt dodges" that are available, I will show you that the dire near-term predictions aren't anything to fear. Long-term, however, this country really does need to slash its debt-load. But that requires a real commitment, not political maneuvering.

False Alarm?

U.S. President Barack Obama yesterday introduced his $3.7 trillion budget plan for fiscal 2012, in which he aims to cut the federal deficit to $1.1 trillion next year. The spending plan will jump-start a debt-ceiling debate that's been underway since late last year.

Back in January, U.S. Treasury Secretary Timothy Geithner urged lawmakers to raise the $14.29 trillion debt limit – or risk a government default that would spark "catastrophic economic consequences that would last for decades." In an appearance on Friday, Geithner said it's "essential" for Congress to raise the debt ceiling if the United States is to maintain investor confidence.

Republicans have been calling for deep – and specific – spending cuts in exchange for raising the debt limit. But Geithner said the debt ceiling should not be used as a bargaining chip.

But the debt-ceiling debate is just so unnecessary. In the long run, the American taxpayer would be better served by having the Inside-the-Beltway crowd make a real attempt to slash the federal debt load.

In fact, should anyone down in Washington wish to ring me up, I could demonstrate three easy ways to sidestep the debt ceiling – freezing the debt-ceiling debate in its tracks by proving that this looming confrontation is nothing but additional political theater.

Let's look at each of my three debt-ceiling "solutions."

Debt-Ceiling Debate Breakers

Sale and Leaseback: This well-known technique is used by retail chains all over the world. So why not put it into effect on a much grander scale? After all, the United States has some pretty fancy assets, and can raise money by selling them. Naturally, it would not want to lose the use of, say, the White House, or the Smithsonian Institution (with contents), so it would lease the assets back, probably for a very long term.

When the lease runs out – say, in 2061 – America's Chinese creditors would have the right to take over the White House. But, hey, that's business. Needless to say, for such prestigious assets, the U.S. government could extract a premium price. The White House, after all, isn't just another 10,000-square-foot McMansion with a helipad: It has a fantastic view of the Washington Monument and the Lincoln Memorial Reflecting Pool, worth a premium to any self-respecting billionaire buyer.

The only pity is that the United States can't play the ultimate trick with out-of-town buyers by selling them the Brooklyn Bridge – the New York City Department of Transportation owns that.

Subprime Debt: Once the U.S. government has sold and leased back all the assets for which it can find a convenient market, it can roll out a second Wall Street financing technique – the subprime mortgage. Since Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCKO) are technically not part of the government, mortgages guaranteed by Fannie and Freddie don't count as public debt. Hence if the Department of Defense (DoD) wants to buy a new bomber, it sets up a Special Purpose Vehicle (yes, another Wall Street dodge) to own the bomber, then finances it through a mortgage guaranteed by Fannie or Freddie.

You may ask: Why subprime? Surely, the Department of Defense, as an agency of the U.S. government, can be trusted to pay its debts? True, but there's a small problem: Fannie and Freddie are only supposed to lend against housing.

No worries – Wall Street has a solution to this, too: It's called the "no-docs (no-documents) loan." (It also has another name: the "liar loan.")

Back in 2006, a borrower using a no-docs loan to a $700,000 house did not have to note that he was doing so without a job.

Similarly, this time around, the DoD won't have to declare that the asset being financed is a stealth bomber, not a house. To add verisimilitude, instead of naming the bomber "Enola Gay" or "Memphis Belle" or something equally authentic, the DoD can name the aircraft "31 Acacia Avenue" – and perhaps paint its nose a tasteful shade of pastel green. That way, the subprime mortgage that finances it will have just as much reality as the typical subprime loan of 2006 – and a rather better chance of getting repaid, if the Department of Defense comes into some money somewhere along the way.

Quantitative Easing: If Wall Street techniques prove themselves insufficient, the government can still sidestep the debt-ceiling debate by employing some "Bernanke-esque" tactics. Under the second round of quantitative easing, aptly referred to as "QE2," the U.S. Federal Reserve and Chairman Ben S. Bernanke are creating $75 billion each month and using it to buy $75 billion of medium- and long-term U.S. Treasury bonds. That, in itself, does not get around the debt-ceiling limits – the government still has to create the Treasury bonds to sell them to Bernanke.

However, the actual existence of the Treasury bonds is essentially superfluous. Bernanke can achieve exactly the same monetary effect, without the annoying necessity of creating Treasury bonds and blowing through the debt ceiling, by printing $75 billion worth of $100 bills each month – and then driving them ‘round to the U.S. Treasury building in a truck, where "Turbo Tim" Geithner can unload them and use them to pay bills.

It would be quite a trucking job, mind you: $1 million in $100 bills weighs 22 pounds, so $75 billion would weigh 750 tons – roughly 20 full truckloads. That's not an impossible quantity: The deliveries could be made daily, though the times would have to be staggered to foil hijackers.

In any case, this operation, while cumbersome, would represent absolutely no change in monetary policy from what the federal government is currently doing now.

The Uncle Sam Sham

It might be argued that the Wall Street and Bernanke-financing techniques described herein are thoroughly unsound, and are bound to lead to ruin.

But so are the monetary and fiscal policies that the government is right now pursuing.

And anyone who wants proof can just look at the fact that the next big Capitol Hill fracas – after the one focusing on President Obama's budget plan for the new fiscal year – will be a debt-ceiling debate. Instead of all this wheel-spinning and political grandstanding, what the administration and both parties in Congress should be focusing on is the serious long-term budget adjustments and spending cuts that need to be made if this country is to regain its former strength and position of leadership in the global marketplace.

The debt-ceiling debate is shaping up to be Washington's Waterloo moment: It's the debt load – not the debt ceiling – that matters and that must be addressed.

Given how easily a massive debt load can crush the finances (and future) of the person, company or government that has to endure it, it's clear to me that the time to attack and slash those trillions in federal debt is now – not later.

Indeed, this may well be our last chance to do so.

Special Note: Today's issue of Money Morning contains a related story on the Obama administration's budget proposal for fiscal 2012. To access that story, please click here.

[Editor's Note: Money Morning's Martin Hutchinson predicted the global financial crisis – warning investors about the dangers of so-called "credit-default swaps" months before they imploded – and he even "called" the bear-market bottom. Hutchinson then predicted the subsequent bull markets in silver and gold (advising investors to buy gold when it was trading at $770 an ounce).

As an active investor, you have only one question to ask yourself: Why wouldn't I want a guy like that on my side? Well, now you can do just that. With Hutchinson's "Merchant Banker's Alert" advisory service, you can benefit from the financial acumen of the former global merchant banker who's made the afore-mentioned market calls, and who's even given entire governments financial advice. To find out how to put Hutchinson on your side, please click here.]

I also believe it is far too late for the US to save itselfl We have been digging this hole for 100 years +/-, we won't get out of it anytime soon- if ever. I like the idea of inflating ourselves out of the mess.

True, the debt must be addressed… but does it ever happen or ever take priority to the spending promises made during election season? People never think more than 4 years ahead, and always vote in the person who has the most extravagent promises right NOW. Good luck getting them to vote in a guy like Ron Paul who "tells it as it is" and has voted against every unbalanced budget since he's been in office.

the present government seems to have only one job on it's mind and that is THE BANKRUPSY OF THIS COUNTRY!!!
IN MY OPINION DON'T RAISE THE DEBT CEALING OR WHAT IT TAKES TO FORCE THE GOVERNMENT TO DECLARE BANKRUPSY. WE ARE GOING TO DEFAULT ANYWAY SO LETS DO IT RIGHT NOW AND GET IT OVER.
WHAT WILL THE REPOCUSIONS BE? WILL THEY BE ANY WORSE IF WE HOLD OFF THE DEFAULT A COUPLE MORE YEARS OR JUST DO IT NOW????????

Great Plan but it will never be implemented because both sides are more concerned about
being reelected than solving problems and making the hard choices! For the past 31 yrs,
going back to the days of Reagan the federal debt and deficits have been on the screen
yet no republican has actually submitted a balanced budget or will so it is a moot point.
Bonner is speaker of the house yet the debt and deficit continue to grow all the while
and will continue no matter who gets elected. Therefore, default on the national debt
is a mathematical certainty and all of the bad catastrophic consequences with it!!! It is
too late for Washington and no one listens or applies logic any more tax cut and budget
deficits for ALL!!! Good Day

Of course, if they cannot enact a few simple, political sacrifice cuts in exchange for the debt ceiling vote…. they have no more guts than the last congress. Hope springs eternal, but I am not holding my breath.

@posters – I think Martin knows about Sale-Lease back. While there are legitimate uses, it's an old mechanism for committing scams. Selling the White House is the investment column equivalent of tongue in cheek.

Perhaps Mr. P. III can tell us if Martin is serious. But painting the bombers convinced me that Martin had not gone through psychotic transition….

There is a simple solution to pay off the 14 trillion plus national debt. Sale all the public lands owned by the general public. Some states are mostly Federal lands. I believe the state of Nevada is about 90% non-private, Government administered lands by the Department of the Interiors-Bureau of Land Management. Most of the Western States lands are likewise mostly owned or controlled by the Federal Govt. If this was done, the Dept. of the Interior could be eliminated saving millions of dollars If these millions of acres of lands were sold to the general public, local county jurisdictions would also be able to collect millions of dollars of property taxes.. Also, there are thousands of Federal and State buildings that could be sold and leased back.

Gov. Schwartzenegger formulated a plan to sell government buildings to pay off some of the state debt. Gov. Brown's administration re-examined the deal and found that over time the state would pay billions more in rent than it received from the sale price of the properties.

That is, the plan would create a net loss of billions.

If a business is in debt and it sells off all assets to pay the debt, nothing is left to generate future profits.

That is basic business. Again Martin Hutchensin has laid an egg. There is no plan there just capitulation, throwing in the towel. The readers' comments are even more pathetic. There are no ideas here, just sniveling.

Another idea would be to stop the government from establishing national monuments in areas where we have proven the existence of oil and natural gas. These areas could then be leased out to drilling companies, who would be forwarding royalty payments to the Treasury, which would actually be earning money from areas that are uneconomic to care for. Then, instead of a net outflow, they would be generating a net inflow. And don't get me started on the offshore areas!

The Republicans support tax breaks for the wealthy, the CEO's, CFO's earn hundreds of millions/year in bonus, pay and fringe benefits, while the middle class workers get squeezed on their hourly pay and pensions. Is that fair?

Are we paying our dues equally? Can we continue like this? How many wealthy have foreign accounts and use all the loop holes to pay Zero taxes? Any suggestions? would you support a flat tax system (without any excuse/loop holes)?

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